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Imperial focuses on growth brands

Bosses doubt further consolidation among Big Tobacco as Imperial steams ahead with cost-cutting strategies
May 3, 2017

Imperial Brands ' (IMB) management was keen at the half-year stage to play down the likelihood of major M&A activity, and focus on sales growth. Chief executive Alison Cooper said further consolidation in the tobacco industry, after British American Tobacco (BATS) made a deal to buy Reynolds American (US:RAI), was "not impossible, but very difficult". File that under 'we'll see'.

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There is an ongoing industry challenge to be dealt with, as volumes decline. Imperial sold fewer cigarettes than it did in the previous year, as tobacco volumes were down from 134bn stick equivalents in 2016 to 126bn. Imperial's strategy has shifted to invest an extra £300m in the growth and specialist brands this year, which currently deliver 60 per cent of the group's tobacco net revenue, and to encourage consumers to buy these products instead of lower priority alternatives. Growth brands such as Davidoff, Gauloises Blondes and JPS outperformed the market in the period, with volume growth of 3.2 per cent in this segment.

Specialist brands include Kool, but there is an increasing emphasis on e-vapour products such as blu, given the increased popularity of vaping in developed markets. A portable, caffeine-based low-calorie energy product is undergoing tests: although management was cagey about the details.

Some £160m was spent in the first part of the year expanding its footprint and reforming its operations, and although a number of these projects are not likely to bear fruit until the second half of the year and beyond, analysts have been encouraged that priority brands are building momentum. The cost-saving programme has been more efficient than expected, with £60m of costs cut this half and £130m expected in the second half, up from £90m announced in November.

Imperial has continued to push its market share internationally after it announced in January a joint venture with a subsidiary of China Tobacco, which will promote its Davidoff and West brands in China, and the Horizon and Jadé brands in other markets outside the People's Republic.

Analysts at Barclays expect adjusted pre-tax profit of £3.3bn for the year to September 2017, giving EPS of 269p, up from £3bn and 249p in FY2016.

IMPERIAL BRANDS (IMB)
ORD PRICE:3,755pMARKET VALUE:£36bn
TOUCH:3,753-3,755p12-MONTH HIGH:4,154pLOW: 3,324p
DIVIDEND YIELD:4.3%PE RATIO:35
NET ASSET VALUE: 546pNET DEBT:251%

Half-year to 31 MarTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201612.845230.447.0
201714.380470.751.7
% change+12+78+133+10

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*Quarterly payments of 25.85p per share on 30 Jun 2017 (ex-div 18 May) and 29 Sep 2017 (ex-div 17 Aug)